At the end of World War II, G.Is. had a little time to linger in
Europe before heading home, so they embarked on the all-American
The U.S. dollar was so strong, these soldiers could buy small
items like boxes of chocolate -- and big items like British
motorcycles -- at shockingly low prices.
Fifty years later, U.S. consumers found out what happens when a
super-strongcurrency loses its luster. The U.S. dollar no longer
buys as much abroad as it once did, and a shopping spree in Paris
or Londonwill cost alot of dough.
Of course, theinvestment world has been feeling similar
effects as well. The long-term fall in the dollar means U.S.
companies can no longer snap up foreign rivals for a cheap price.
But a falling dollar also means that any foreign assets that
companies and investors own have risen in value. (Note that since
the GreatRecession of 2008, thegreenback has firmed up a bit in
what's known as a "Flight to Quality ," but economists expect the
dollar to weaken anew in the long-term.)
The question for many investors: How can I properly position my
The prospect of a further fall in the U.S. dollar means it's
crucial to ensure your portfolio has stakes in other economies.
U.S. investors have hundreds of global investment options, so you
should make sure that your portfolio has exposure to them.
For example, it's quite easy to buyshares of many foreign
companies through what's known as American depositary receipts
(ADRs). These are U.S.-listedstocks that move in tandem with their
equivalent shares in foreign markets. For example, shares of
Germany's Daimler (Nasdaq:
, theparent company of Mercedes-Benz, trade here in the United
States as well. There are now hundreds of ADRs available, and you
can read more about them at
.com. If you want to get a better understanding of the pros and
cons of foreigninvesting , then the Securities &
ExchangeCommission has a thorough discussion,
which you can read about here
In addition, an increasing number of U.S. investors are seeking
to gain exposure to entire countries or regions through the use of
). There are many country-specific ETFs offered by Barclays as part
of itsiShares program, which
you can read about here
There are also international ETFs offered by firms like Global X
Funds and Wisdom Tree. These firms tend to take a thematic
approach,offering ETFs that provide exposure to certain types of
companies (such as dividend-producing industrial stocks in Asia).
If the U.S. dollar is indeed set to weaken anew, then you'll
benefit by owning foreigninvestments as they will rise in value to
the extent that the dollar loses value.
Why do economists say the dollar will weaken? There are several
factors, but the most important one affecting currency moves is a
country'strade balance .
Whenever a country runs a trade surplus (i.e. it exports more
goods and services than it imports), its currency will strengthen
as each country in a trade arrangement must buy or sell each
other's currency to buy (or sell) goods. This helps explain why
Japan's currency, the yen, has gained a great deal of value in the
past few decades as the Japaneseeconomy has consistently run trade
surpluses. What's the net result of Japan's surging currency? The
yen is now so strong, Japan's trade surpluses have vanished as its
goods have become unaffordable to its trading partners. Simplyput ,
Japan is no longer an export powerhouse precisely because its
currency is now so much stronger.
The United States, in contrast, has been running massive trade
deficits (importing a much greater value of goods and services than
it exports), which is why economists say the dollar will have to
fall in value until the cost of doing business falls in the Unitd
States and rises higher for countries that are running trade
surpluses with us. In the short-term, other factors can prevent
that from happening, but a look at currency trends over several
centuries confirms the notion that trade balances are deeply
interconnected with a country's currency.
Indeed, a weakening dollar could trigger a renaissance in U.S.
manufacturing as the relative labor andoverhead costs fall relative
to other economies, which means that U.S. companies
will eventually be a lot more competitive in foreign
markets, while their foreign rivals will be less competitive in our
Action to Take -->
Although the United States continues to rely heavily on imports,
exports are also rising at a solid clip. If current export growth
rates continue, then the we could eventually wipe out our
trade imbalance. Until then, the dollar is likely to weaken.
In response, you shouldhedge your portfolio by increasing your
exposure to foreign companies and funds that are likely to increase
in value as other countries' currencies strengthen. With so many
new ways to invest abroad (thanks in large part to the increasing
popularity of ETFs), you can easily find the right mix of assets to
This article originally appeared on InvestAnswers.com:
"The Dollar Is
Getting Weaker -- Here's What Investors Should Do Now"
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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